Q. Can you purchase a residential property using your self-managed super fund, gut it, renovate it completely and then sell it?
A.The short answer is yes, but there are many rules and traps to watch out for if you are considering such a project.
Firstly, the trust deed of the self-managed super fund (SMSF) should allow for investment in residential property. Most SMSF trust deeds would allow it, but some older trust deeds may not. Secondly, the fund’s investment strategy should provide for property investment and development. Thirdly, the residential property can only be purchased from an unrelated party of the SMSF.
In respect of the costs of renovation, payments for materials and labour generally can only be made by the fund and not by the fund member or a related party. If any of the labour is carried out by the fund member or a related party (for example, the fund member is a builder), this must be authorised by the trust deed. Furthermore, these people would need to have the appropriate skills to carry out the work and they would need to be paid a commercial rate for their services.
Finally, the financial aspect of such a project may not be suitable for an SMSF, given that such a project may require a lot of capital and fund members are limited under the super contribution rules as to how much they are able to contribute annually to super. Also, if the property is acquired by the fund with borrowings under a limited recourse borrowing arrangement (LRBA), the rules do not allow further borrowings to finance the cost of the renovations. Under this scenario, the renovations would need to be financed by existing funds of the SMSF, or additional contributions made by the fund members.
Andrew Yee, director superannuation, HLB Mann Judd
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